City of Prescott v. Town of Chino Valley

• Decision Date: 14 November 1989
• Docket Number: No. 1,CA-CIV,1
• Citation: 790 P.2d 263,163 Ariz. 608
• Parties: CITY OF PRESCOTT, a municipal corporation, Plaintiff, Counterdefendant, Appellee, Cross-Appellant, v. TOWN OF CHINO VALLEY, a municipal corporation, Defendant, Counterclaimant, Appellant, Cross-Appellee. 9754.
• Court: Arizona Court of Appeals

Page 263

790 P.2d 263

163 Ariz. 608

CITY OF PRESCOTT, a municipal corporation, Plaintiff, Counterdefendant, Appellee, Cross-Appellant, v. TOWN OF CHINO VALLEY, a municipal corporation, Defendant, Counterclaimant, Appellant, Cross-Appellee.

No. 1 CA-CIV 9754.

Court of Appeals of Arizona Division 1, Department B.

Nov. 14, 1989.

Review Denied May 8, 1990.

Cross-Petition for Review Granted in

Part and Denied in Part

May 8, 1990.

Lewis & Roca by Tom Galbraith, Susan M. Freeman, Patrick Derdenger, Jessica J. Youle and Gale L. Garriott, Phoenix, for plaintiff, counterdefendant, appellee, cross-appellant.

Ajalat & Polley, P.C. by Terry L. Polley, Charles R. Ajalat and Richard J. Ayoob, Los Angeles, Cal., and Stan A. Lehman, Prescott, and Paul G. Ulrich, Phoenix, for defendant, counterclaimant, appellant, cross-appellee.

Brown & Bain, P.A. by David J. Bodney, Daniel C. Barr, Michael W. Patten, Phoenix, for amicus curiae First Amendment Coalition of Arizona.

RICHARD M. DAVIS, Judge Pro Tem.

This case involves a transaction privilege tax enacted by the Town of Chino Valley (Chino Valley) and imposed by it upon the operation of a water pipeline owned by the City of Prescott (Prescott). The trial court upheld the enactment and imposition of the tax. In its cross-appeal, which we will first consider, Prescott contends that (1) the trial court was without jurisdiction; (2) Chino Valley's tax was enacted in violation of the Open Meeting Law; (3) the tax is preempted by the Groundwater Management Act; (4) the tax as applied to Prescott was invalid as lacking sufficient nexus; (5) Prescott's pipeline was exempt from the tax; and (6) the tax was unconstitutional for lack of apportionment. In its appeal, Chino Valley contends that the trial court erred (1) in its determination that the Board of Tax Appeals should proceed to determine the recipient or a proper division of the taxes in question, and (2) in its decision denying Chino Valley's claim for attorney's fees. We affirm most of the trial court's rulings but conclude that the tax should be apportioned and remand for that purpose.

CORE FACTS

For approximately 40 years, Prescott has drawn water from wells on land it owns in what became in 1970 the incorporated town of Chino Valley. In the years encompassed by this litigation, which was begun in 1985, over 90% of the water supply for Prescott and its environs served by Prescott's municipal water utility came from these wells in Chino Valley. The water is transported from Chino Valley to Prescott by a pipeline owned by Prescott. Approximately two miles of the 17-mile pipeline are in Chino Valley. There are also within Chino Valley extensive storage and pumping facilities, and pipeline operating equipment such as a surge arrestor. Prescott owns several noncontiguous parcels of land and buildings in Chino Valley, and it has a full-time employee who resides in Chino Valley and oversees its water operations there. Prescott also delivers water to a few Chino Valley residents.

As Prescott points out, its withdrawal and use of water from Chino Valley has been strongly opposed by the town, or elements therein. In Town of Chino Valley v. City of Prescott, 131 Ariz. 78, 638 P.2d 1324 (1981), appeal dismissed, 457 U.S. 1101, 102 S.Ct. 2897, 73 L.Ed.2d 1310 (1982), Chino Valley unsuccessfully sought In the spring of 1982, members of the Chino Valley town council raised the idea of enacting a transaction privilege tax to increase revenues for improving roads and other purposes. The issue was presented and discussed at public meetings on April 14, April 21, and April 28, 1982. Some public support--or at least a lack of strong opposition--was indicated for such a measure. At another public meeting on May 13, 1982, the council voted to adopt a 1% "sales tax" and directed the town attorney, John Preston, to prepare the necessary ordinance.

[163 Ariz. 611] to enjoin Prescott's withdrawals. While that action was pending, the former groundwater laws were amended to restrict the kind of injunctive relief Chino Valley was seeking. Chino Valley challenged these amendments unsuccessfully in Town of Chino Valley v. State Land Department, 119 Ariz. 243, 580 P.2d 704 (1978). Related litigation included Cherry v. Steiner, 716 F.2d 687 (9th Cir.1983), cert. denied, 466 U.S. 931, 104 S.Ct. 1719, 80 L.Ed.2d 190 (1984).

At the invitation of the town council, representatives of the State Revenue Department attended the June 24, 1982 public meeting. While the minutes of the meeting do not reflect it, and many other subjects were discussed, the idea was advanced at the meeting that the proposed tax should apply to Prescott's water pipeline. At this or a subsequent time, town attorney Preston indicated that the task of drafting a tax ordinance that would effectively include a tax on the pipeline was beyond his expertise, and recommended that the council retain a California lawyer named Ajalat, who specialized in municipal taxation. At an executive session in November, 1982, the council authorized Preston to employ Ajalat, who is one of Chino Valley's counsel in this appeal.

The transaction privilege tax ordinance remained under consideration for many months. In November and December of 1982 and January and February of 1983, Preston brought questions or reports on the drafting of the ordinance to executive sessions of the council. These reports usually had particular reference to the Prescott pipeline. The public notices of each of these executive sessions, which were held during a closed portion of an open public session, did not refer to Prescott's pipeline. In each case, the basis for the executive session was simply stated to be "for legal counsel."

At a public meeting on May 26, 1983, there was a first public reading--actually a reading by reference--of the drafted transaction privilege tax ordinance. The second reading occurred at a public council meeting on June 9, 1983. A public session exclusively on the proposed ordinance was scheduled for June 21. Notice of this meeting, which included reference to the proposed transaction privilege tax, was published in the Prescott Courier on June 14. The third reading of the ordinance took place at a public council meeting on June 23, and the ordinance was passed on that date.

The ordinance as enacted can be characterized as a comprehensive tax code designed to raise revenues from a broad range of economic activities. There are many analogies to the state transaction privilege tax act, A.R.S. § 42-1301 et seq., and to Prescott's subsequently enacted transaction privilege tax code, § 4-1-1 et seq. of the Code of the City of Prescott. Of these, only Chino Valley's code taxes the operation of a water pipeline. Chino Valley's code also taxes the operation of oil and gas pipelines. Besides Prescott, two corporations operating water pipelines in Chino Valley pay taxes to it pursuant to the taxing provision in question here, which reads as follows:

"Section 3. Imposition of Tax--Tax Schedule

"There is hereby levied and shall be collected by the tax collector for the purpose of raising revenue to be used in defraying the necessary expenses of the Town privilege taxes measured by the amounts or volume of business transacted by persons on account of their business activities, and in the amounts to be determined by the application of rates against values, gross proceeds of sales "A. Percentage of Tax and Business Liable to Taxation. An amount equal to one percent (1%) of the gross proceeds of sale or gross income from the business upon every person engaging in or continuing within the Town in the following businesses:

[163 Ariz. 612] or gross income, as the case may be, whether derived from residents of the Town or not, or whether derived from within the Town or from without, in accordance with the following schedule:

* * * * * *

"(3) Operating a pipe line for transporting oil, or natural or artificial gas, or water, through pipes or conduits from a point within the Town to another point in the Town or in the State."

In time, Chino Valley formally informed Prescott of its liability to pay the tax. Prescott refused to pay, and in 1985 it initiated the present litigation seeking a declaratory judgment that the tax was invalid. Chino Valley filed a counterclaim seeking adjudication of the tax's validity and collection of the tax.

During the skirmishes which followed, Chino Valley moved for partial summary judgment on Prescott's complaint on the grounds that Prescott had failed to pay the tax before asserting its challenge. See, e.g., Smotkin v. Peterson, 73 Ariz. 1, 236 P.2d 743 (1951). The trial court eventually granted this motion, but the minute entry was never reduced to judgment.

Pursuant to stipulation, Prescott subsequently paid taxes to Chino Valley in an agreed amount for the years 1983 through 1985. Just before present counsel began representing Prescott, the City asked for leave to file an amended complaint seeking substantially the same declaratory relief as its initial pleading. The leave sought was granted, again pursuant to stipulation.

The trial court ultimately upheld the imposition of Chino Valley's tax upon Prescott, rejecting several lines of challenge. The trial court did, however, sustain Prescott's last asserted argument--that the provisions of A.R.S. § 42-1452, which address the allocation of transaction privilege taxes between two or more levying municipalities--required reference of the case to the Board of Tax Appeals for resolution of the allocation issue advanced by Prescott. The trial court also denied, after twice considering the matter, Chino Valley's claim for attorney's fees.

We will allude to additional facts where necessary.

JURISDICTION

Prescott's first argument is that the trial court was without jurisdiction to determine the validity of the tax because its original complaint was dismissed. Prescott urges the principle that the courts will not declare upon the...